Construction costs in Saudi Arabia gradually creeping up

Workers stand near the King Abdullah Financial District currently under construction, near King Fahad road in the Asahafa area in Riyadh. Image for illustrative purposes only.

REUTERS/FAISAL NASSER

By Anoop Menon, Thomson Reuters Projects News

The cost of construction in Saudi Arabia is forecasted to increase at a marginally lower rate in the next 12 months thanks to widely-divergent material price movements and aggressive project pricing in a less-than buoyant market, according to real estate services firm Colliers International.

In its recently-issued Saudi Arabia Construction Costs update, the firm has forecasted average construction cost inflation of 1.8 percent for the 12 months starting November 2018, compared with 1.9 percent registered between the third quarters of 2017 and 2018.

In comparison, average material costs increased by 3.1 percent between the third quarters of 2017 and 2018, said Bob Flanagan, Colliers International’s managing director for project management and cost consultancy services.

In an email to Thomson Reuters Projects, he said locally-sourced materials such as aggregate, sand, cement and concrete blocks reduced in cost due to falling local demand.

“However, some materials that are imported, or affected by international pricing such as steel, aluminium, timber, have been directly affected by increased worldwide demand. The price of steel rebar, for example, within the Middle East region increased by 16.5 percent, due to international pricing of this product, which in turn directly impacts Saudi steel prices,” he explained.

Between the third quarters of 2017 and 2018, the average price of rebar increased by 18 percent in Saudi Arabia, while aluminium prices went up by 6 percent, the Colliers report said.

Steep material cost increases haven’t pushed up construction costs because contractors are continuing to price aggressively to win work, according to the report.

“Contractors will not increase their project margins until their order books begin to fill,” the report said.

Notwithstanding numerous new projects announced over the past 12 months and some progress on the giga projects front, it would take “significantly more projects to commence to have a real impact on increasing margins that contractors will include within their bids,” the report observed.

“In Colliers International’s Tender Price Inflation forecast, it is anticipated that the extent of new project awards will not have a significant impact over the next 12 months,” said Flanagan.

In addition to material prices and project workload, a third factor that could drive construction cost inflation, according to the report, is labour.

While the Saudisation push and taxes on expat visas have increased the cost of labour in the Kingdom, “the extraordinary effects of these regulations will be felt” only when a buoyant project market drives up recruitment, the report noted.

“On average, going forward, every 10 percent increase in the cost of labour will swing the cost of construction by approximately 3 percent-plus,” it said.

In its second quarter 2018 Saudi Labour Market Update released last month, Jadwa Investment noted that the total number of foreigners to leave the kingdom’s labour market since the start of 2017 has reached 1.1 million. Some 312,000 workers left in the second quarter of 2018, 187,000 (60 percent) of whom worked in the construction sector.

Saudi Arabia’s Nitaqat or nationalisation programme aims to lower unemployment rate among Saudi nationals by assigning hiring quotas for Saudis to companies as per sectors, with penalties levied on firms failing to meet the quotas. Fees have also been levied on dependents of expat workers. In July, these fees doubled to 200 Saudi riyals per dependent, per month, Jadwa’s report said.

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